Digital Innovation: Internal Or External Team?

Most execs think digital business will change their industries, but only one-third think their companies are ready. It may be time to suit up an innovation team.

If only weathering digital disruption were as easy as building a mobile app and gathering 1,000 Facebook "likes." The fact is: Disrupting your own business model before it gets digitally disrupted is a daily grind. Not only are you up against nimble web start-ups, but also your own corporate inertia.

These obstacles persist despite genuine excitement about digital innovation. Of global execs surveyed by research firm Forrester, 89% believe that digital tools and experiences will change their industries and 65% are excited about these changes. But only one-third of these same execs believe their companies have the policies to adapt to digital disruption.

The barriers could be cultural, structural, or procedural, he says. A company with structural barriers has "excessive layers of anxious middle management standing between ideas and their execution," with "no incentives to engage in collaboration."

Cultural problems are not as clear-cut or formal, but manifest themselves through behavior that's antagonistic to outsiders and new ideas. Procedural obstacles, writes McQuivey, occur when companies hang on to policies that worked 10 years ago, but now get in the way of innovation. Microsoft's infamous stack ranking method, where departments and individuals are measured against the success of other departments and individuals, is an example of outdated procedures distracting from the goal of serving the customer.

To break out of these models, one of the critical questions is whether to build an internal or an external disruption or innovation team. According to a report penned by McQuivey last fall entitled "Organizing For Digital Disruption: Where And How To Ignite The Disruption You Need," you can dedicate a disruption team inside the company. Otherwise you can spend some money and outsource disruption duties to an external team -- a consultancy, or possibly a startup the company has acquired. Walmart, for example, created WalmartLabs in Silicon Valley. It bought startups in the area to create a standalone innovation team.

The ultimate goal is to bring a digital disruption mindset back into the company, making disruption everyone's job. If your company has an open-minded culture across departments (a rarity), McQuivey recommends forming several small teams, "each one tasked with a specific disruptive goal." But few big companies have such a progressive nature, adds McQuivey, so this strategy is more a destination than a starting point. The starting point for most companies is one team.

When should you use an internal versus an external team? Broadly, McQuivey's advice is:

Internal disruption teams can get results when the company's culture is trapped in status quo mode but C-level support for disruption is strong. Separating out an internal team can free it from cultural baggage and show naysayers that innovation is possible.

In a phone interview, McQuivey stressed that internal teams should report to a high-level executive to get credibility. "If the team is reporting to someone three levels down from the CEO, no one will take them seriously," he says.

Transparency is key: The team needs to let everyone in the company know explicitly what they are doing and why.

We are implementing data visualization tools to make our data easier for everyone to understand.

We are redesigning our outdated e-commerce website with new features that will generate more revenue.

External disruption teams can succeed when a company is up against both cultural and structural obstacles. If that's the unfortunate state of your company, then going outside for innovation may be your only choice.

An outside team also requires an upfront investment of perhaps $2 million, ramping up the pressure on this team to put innovative ideas into practice and win over people on the inside. This approach must have very public support from the C-suite, so that internal groups are assured the outside team has the full stamp of approval.

"Certain people inside the company will want this outside team to fail, so the stakes are high," says McQuivey.

McQuivey recommends keeping internal teams small (six to eight people being a good size) with representatives from groups like IT, marketing, and operations. With C-level support, these teams will have the confidence to pursue that new revenue-generating product before a competitor does. Do it quickly, adds McQuivey.

"Some teams overplan, and end up with a project that'll take three years," he says. "Figure out what the customer needs and then start building a product -- fast."

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Shane O'Neill is Managing Editor for InformationWeek. Prior to joining InformationWeek, he served in various roles at CIO.com, most notably as assistant managing editor and senior writer covering Microsoft. He has also been an editor and writer at eWeek and TechTarget. ... View Full Bio

Shane, did he have examples of successful efforts to use external disruption teams? The Apple iphone innovation model used secret internal teams, where people had "need to know" separation. Quite different.

That's Apple being Apple. McQuivey told me transparency is so important with both internal or external teams. There will already be suspicion and resentment, so come clean right away. There's less resentment with an internal team because, by design, people from different departments will be part of the team. It's kept more in the family even if it's a dysfunctional family. External teams are trickier.

Wal-mart has had success buying small companies to be used as separate innovation teams. McQuivey also mentioned a healthcare company, Intermountain Healthcare, that used a standalone company housed in a separate building tasked with working with vendors and testing and recommending medical devices and services. In this case an outside team worked: Doctors and nurses began to collaborate with lab employees on their tech needs and communication with vendors improved. So did patient care results.

It doesn't always go so smoothly. The decision to to go internal or look outside depends on the company's culture, structure and budget.

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